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Can banks make the difficult choices society demands?

The Dakota Access Pipeline (DAPL) controversy illustrates how financial institutions are increasingly being criticised if their responsible investment policies conflict with their actual investments. The DAPL is a proposed USD 3.78 billion pipeline of 1,886 km being built in the United States by Dakota Access, LLC, which is a subsidiary of Energy Transfer Partners (ETP). It will be built to transport oil from the Bakken oil fields in northwest North Dakota to an oil tank farm in Illinois. The project is almost complete, but has faced strong opposition that has resulted in forceful confrontations with local communities. Criticism of the DAPL centres on the potential environmental impact it could have, in particular regarding possible contamination of the Missouri River and Lake Oahe, which are important water sources for local communities. Activists in the Native American community, from amongst others Standing Rock Indian Reservation, oppose the pipeline claiming that itthreatenstheir lands, sacred places and way of life. The project was halted on the 4th of December by the United States government when permits to cross under the Missouri River were denied.

Apart from financial risks involved in the financing of projects that face significant public and civil society opposition, there are also substantial public relations risks for banks. The DAPL is financed by over 35 banks, be it through project financing or by providing credit to the companies that are constructing the pipeline. Several of them have adopted the Equator Principles, many have detailed responsible investment policies, some even receiving good scores in the Fair Finance Guide International policy assessments. Nevertheless, banks in the US, Europe and Japan are under heavy criticism from NGOs, including Greenpeace, BankTrack and Amnesty International. While most banks argue that their financial involvement is minimal or only indirect, they are risking a serious dent in their reputation as responsible corporate citizens.

What lessons can financial institutions learn to avoid such problems?

First, a proper due diligence approach is essential. This should not only scrutinize a specific project but should also extend to the companies behind the project itself. This would provide better insight into any (in)direct ESG risks involved.

Second, this is not the first time that the construction of a pipeline has come under fire. This kind of project is risky in terms of public relations, human rights risks – especially regarding indigenous peoples, land rights and Free Prior Informed Consent processes – and severe environmental consequences. Investors that do not take precautions run the risk of being exposed to targeted campaigns by civil society and to public criticism, with few options to withdraw from financing.

Third, banks should respond adequately to a problem before it turns into a crisis. It does not look good to issue a statement months after mainstream media have started reporting on the issue at hand, or worse, to issue no statement at all.

In recent years we have seen a strong increase in environmental and human rights campaigns targeting banks and investors. Financial institutions are viewed as participants throughout the supply chain, as financiers setting the terms of investment at the start of a project and as shareholders looking for financial returns when a project is concluded. Many banks and investors have responded to these demands of society by developing responsible credit and investment policies.

However, many banks have not realized that this policy approach tends to exacerbate the reputational risks they are exposed to when they avoid the difficult and sometimes painful choices needed to put their policy into practice. More and more, financial institutions will be facing criticism for not living up to their commitments, as civil society will intensify its financial campaign approach. This constitutes a key strategic challenge: which financial institution is willing to consistently say “no” - or at least “no, unless” - to existing clients and new investment opportunities when these contradict its responsible credit or investment policy?